Why Retirement Gets Tricky When the Stock Market is Down

As your retirement date approaches, after 40 years of saving, planning and working, the word “volatility” can become a euphemism for danger. After all, who wants to retire just when falling markets are eroding their nest egg?

Unfortunately, for those contemplating retirement in the next year or two, that “V” word has popped up in just about every market prognostication, with many commentators fearing a potential bear market. With the SP 500 down 1% for the year and more than 5% from its 2015 peak – after seven years of gains – is it time to rethink your retirement timing?

Not so fast. There are ways to traverse retiring in a downturn. Looking at the past, Vanguard found that those who retired at market peaks with $100,000 (adjusted for inflation) in 1928 and 1972 would still have had money in their portfolio at age 100, assuming a 50-50 stock-to-bond mix and a 4% withdrawal rate. But if the market sinks quite a bit between now and your retirement date, things could get trickier.

Of course, the easiest solution to ensure that you’ll have enough funds in retirement is to simply work longer than you planned. It’s not the most appetizing option, but for every year you delay, you gain about 7% in annual retirement income, assuming you save 15% of your salary, according to the American Association of Individual Investors. The size of your Social Security benefit also gets larger, by about 8%, for every year that you delay retirement between age 62 and age 70. Even part-time jobs within retirement can help hold off the need to withdraw savings or start Social Security, saving it for clearer days.

But if working longer is out of the question, you can ease your transition by building at least a year’s worth of living expenses in an emergency retirement savings fund, ideally in cash, says Celandra Deane-Bess, a wealth strategy director for PNC Financial Services Group. It gives you “a resource to tap” in worst case scenarios, which will ensure you don’t panic if the market drops 500 points in a day, she adds. And having that cash on hand will keep you from having to sell stocks or other assets when their value is depressed.

The next thing you will need to keep an eye on is your withdrawal rate. The conventional wisdom is to withdraw 4% of the value of your retirement portfolio every year, no matter the market situation. Assuming you had a strong savings plan based on a thoughtful estimate of your expenses, then that income will ensure that your savings last your lifetime. However, Vanguard found thatin 48% of the years, a saver using this strategy doesn’t reach his target income level. This strategy “ignores overspending” during upturns when a 4% withdrawal can mean a significant amount of money beyond your needs, says Vanguard’s senior retirement strategist in its Investing group Colleen Jaconetti. During downturns, the 4% number may not cover most of your expenses.

Instead, Jaconetti suggests considering a floor and a ceiling that you might withdraw at. During downturns, you would withdraw the lowest amount you would need in order to pay your expenses throughout the year. During upturns, you would put a limit on what you withdraw, to prevent spending too much. It builds “some sort of flexibility to your annual spending plan,” says Jaconetti.

This strategy has a 92% chance of making sure your money lasts 35 years. While people using this strategy need to be more disciplined about their spending, cutting back when times are tight and not going quite as wild during up years, the idea ensures you’ve planned for worst-case scenarios with your floor scenario. It’ll more likely ensure you don’t have rough years where even normal expenses become difficult to cover.

The idea of reducing your withdrawal amounts based on the market performance of the previous year also assumes that you can take (sometimes significantly) less in certain years and still cover your expenses.

If you have money left over, then maybe it’s time to reinvest in the market. After all, buying into the downturn could give you a nice upside when it turns again. Or, you know, go on that dream vacation; whichever eases your mind.